New Yorks senior U.S. Senator, Charles Schumer, was the first to argue for overriding the patent on the anti-anthrax drug Cipro, which is produced by the German drug maker Bayer AG. However, it was Canadas government that first followed words with action and unilaterally granted a domestic manufacturer, Apotex Inc., permission to produce the antibiotic despite Bayers legal monopoly, which will not expire there before 2004. Only a few days later, Canadas government reversed its decision following stinging criticism by its own parliamentary opposition and by the head of the International Federation of Pharmaceutical Manufacturers Associations.

Nevertheless, the U.S.where Bayers patent is valid until 2003and Canada are now both pursuing the same dangerous policies by other means: Bayer is in essence being blackmailed into accepting cutthroat prices. One Cipro pill will henceforth be sold to the Canadian government for $1.30 and, closer to home, U.S. Health and Human Services Secretary Tommy Thompson has announced that he secured even more dramatic concessions, getting Bayer to agree to sell the drug for $0.95 per pill. Previously, the already greatly discounted price for government purchases had been $1.77 as compared to $4.67 for pharmacies.

It is now questionable what will turn out to be more detrimental to the North American economy, the anthrax scare itself or the shortsighted response by politicians in the U.S. and Canada. Despite assurances by President Bush that the terrorists will not be allowed to change our way of life, this more than any other governmental action supplies evidence to the contrary. There seems to be widespread, if reluctant, acceptance of arguments that some curtailment of liberties and individual rights is necessary to enhance the ability of law enforcement agencies to pursue and capture the perpetrators of terrorist acts. Such a tradeoff is implicit in recently passed anti-terrorism legislation that President Bush signed into law. It is, however, much more difficult to justify the destruction of one of the very bases of open societies, a system of property rights enforcement and incentive-driven entrepreneurship that is the key to sustained growth in industrialized nations.

The pharmaceutical industry is one in which the appropriation of returns to research and development is most effectively achieved by the patent system. Tampering with the price mechanism will seriously impede this function. The results will not only be short-run losses for Bayer AG, but also much more seriously, long-run changes in the decision making processes of major drug manufacturers. The development of safe and effective drugs is highly cost intensive and companies need the assurance that they will be able to recapture their initial investments once their products have been approved for sale. The patent system is designed to give them this assurance, including the right to set their own price. Letting the anthrax scarenews that has, in the words of Dan Rather, been rather over-reportedbreak this link between up-front investments and future profits reduces the expected returns to R&D and greatly increases the uncertainty of the whole drug development system. An increase in the number of companies permitted to produce Cipro nowor forced reductions in the antibiotics pricemeans that fewer new drugs will be produced in the next 10 to 20 years than would have otherwise been the case. Already willing to sell drugs to governments at steep discounts, drug makers now have to worry that they may be bullied into accepting even lower returns or face the loss of patent protection altogether.

Furthermore, this surprising move, which by international law is only allowed in cases where a government declares a national health emergency, will only reinforce the view in developing countries that different standards apply to them. What happened when Brazil and several African governments recently sought the suspension of patents on AIDS drugs held by Swiss and American firms? Their efforts were wisely rejected in favor of leaving the patents intact, thereby preserving the incentive to develop better drugs.

How, then, does one explain to those governments that an anthrax panic in North America trumps the massive death toll on the African continentespecially when the existing supply of Cipro more than adequately meets the rational demand for it? At a time when the West is at pains to picture its War on Terrorism as a fight for the benefit of all good nations, indications of discriminatory treatment in favor of industrialized countries should be avoided.

The same goes for hasty actions that threaten private property rights and undermine the rule of law. The Canadian governments ill-advised response, Senator Schumers political grandstanding and Secretary Thompsons or else demands are far more damaging than any single terrorist attack has ever been.